Bertrand price competition

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Q1. Bertrand Price Competition, the two firms have the same demand curve P=100-4Q, Marginal cost of Firm 1 is 5 and for firm 2 is 10. What will be the resulting price in the market? What is each firm's profit?

Q2. Explain the importance of credibility when evaluating a firm's potential moves. For example, if firm two is the "responder" in a Stackelberg game, it may threaten to flood the market if firm one (the "leader") does not set a low quantity (say, ½ of the monopoly quantity). Should firm one consider this threat to be credible? How might the answer change if firms are playing this "game" repeatedly over many periods? What are some strategies that firm two can use to gain credibility?

Reference no: EM136894

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